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Tax Tips

The Kiddie Tax: A Basic Review

Weekly Tax Tip for July 26, 2010

Got college-bound kids? Then you might have questions about the kiddie tax, since these federal rules can apply to the unearned income of full-time students up to age 24.

Here's an overview.

The basics. The kiddie tax affects how much you'll pay on part of the investment income your child receives, such as interest or dividends. When the rules come into play, this "unearned income" is taxed using your rates.

How the tax is applied. For 2010, the first $950 of your child's unearned income is tax-free. Tax is calculated on the next $950 using your child's federal tax rate, which can be as low as 5%. Unearned income over $1,900 is taxed at your federal income tax rate, when that rate is higher than your child's.

For an 18-year-old, the kiddie tax applies when your child's earned income — that is, money received from wages, salary, tips, commissions, and bonuses — is less than half the cost of providing necessities such as food, clothing, and shelter.

The same 50% support exception applies when your child is a full-time student and age 19 through 23.

Planning tip. Consider hiring your college student in your family business. Wages are earned income and can lessen or eliminate the kiddie tax.

Still have questions about the kiddie tax? Give us a call. We have answers, information, and planning strategies.

"Tax Tips" are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.

The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.

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